The stench of death hangs around the euro, despite emergency meetings, crisis summits and rescue attempts.


    For the last 18 months, the euro has been in trouble. There have been a series of emergency meetings, crisis summits and rescue attempts but still the stench of death hangs around the currency. Its future should become clearer in the next month or so.

    Just two weeks ago, eurozone leaders were patting themselves on the back for creating the European Financial Stability Facility, a mechanism to help countries who found borrowing on the open markets much too expensive. The problem is that Italy is now in trouble and the EFSF simply is not big enough to bail out the world’s eighth largest economy.

    Italy has been in trouble for a while – but things started to get substantially worse in June when its credit rating was put on watch by global credit agencies. Slowly the cost of borrowing ticked up. Italy refused to do much about it. Panic spread. The cost of bonds hit a 14-year high of 6.189 per cent, which essentially means Italy was shut out of the international financial markets.

    At that point Italian Prime Minister Silvio Berlusconi finally took action.  He announced a round of austerity measures – spending cuts and tax rises – and brought forward the date when Italy’s budget would be balanced to 2013.  

    That was enough to secure support from the European Central Bank. It announced it would step into the market on Monday and buy up some of the debts of countries that were struggling, steadying the markets in the short term at least. It did, however, leave the impression that the ECB was dictating policy in exchange for financial support.

    Four of the 23 ECB governing council members – including the key vote of the German Central Bank chief – are against bond purchases.  

    And it’s divisions like that which have been exploited by the markets.  

    The options for the euro are now becoming clearer.

    First the countries backing the EFSF can pour more money into it.  It is expected to have a fund of around $630bn but it needs around $2.8 trillion if it’s to cover the debts of Italy and Spain, which is also considered at risk.  That is thought to be unpopular and unlikely.

    Or there can be full fiscal integration across the eurozone. The euro was always a political project rather than a financial one. Full integration would mean a centralised financial policy implemented across the continent, a loss of sovereignty over financial matters for many capitals and in the current climate, severe austerity measures which would be deeply unpopular.

    This would create a new European finance ministry and as the strongest economy, Germany would have to pour huge financial resources into it and give it enough clout to guarantee the debts of eurozone countries. Getting all 17 members of the eurozone to sign up to that seems highly problematical.

    Another alternative is scrapping the Euro altogether.  That would be extremely expensive and have huge implications for the banking sector which has massive exposure to eurozone debts. A huge injection of funds would be needed to stop a run on the banks. Some analysts believe the Germans regard this as the less expensive long-term option.

    For 18 months, every decision taken to safeguard the euro has been largely a political one as leaders and finance ministers try to decide how far they can go without losing massive support at home. And that had led to fears about Europe’s ability to get ahead of the crisis and deal with it rather than react to events. It’s become known as "kicking the can down the road".

    The austerity cuts, so beloved by central bankers and financial institutions, almost always mean higher taxes, a more expensive cost of living, poorer public services and job losses millions of job losses. That hits the prospect of growth in economies, which in turn generates fears of recession or depression. Macro economics is about large numbers and large concepts – and it’s easy to forget it affects real people and real lives.




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